4 ms·

We're in a bubble folks, plain and simple. The fact is no one knows how to price these things. These valuations are betting that being essentially a first mover

We're in a bubble folks, plain and simple. The fact is no one knows how to price these things. These valuations are betting that being essentially a first mover in a new market that has endless possibilities is worth many billions. Eventually people will get tired of waiting for these expected profits to roll in and the crash will soon follow.

ajross 15y ago
Undeniably. Now the question to me though is how a pre-IPO valuation bubble pops. Obviously lots of venture investors lose a lot of cash if these companies can't exit; but that cash wasn't in the public markets anyway and shouldn't cause a ripple, right? Who is bearing the risk here? What money will flee where when it becomes clear that Groupon and Evernote are losses and that Facebook is going to break even at best with their IPO?
- adamjernst 15y ago
  All this VC money comes from pension funds, university endowments, and other large institutional investors that are looking for a return on investment that is higher than regular public equities. When the crash comes, pensions and endowments will stop seeing tech venture funds as a safe investment so they'll shift their money elsewhere, leaving VC firms without money to invest.
  - ajross 15y ago
    Exactly, so it really doesn't "pop" then, except in the sense of drying up access to cash in our own little community. That doesn't sound so bad. Remember YC was founded in an environment of limited venture funds and those early startups seem to have done quite well on the whole.
rollypolly 15y ago
When would you say this bubble started?
clarky07 15y ago
I'm fine with calling instagram type stuff a bubble, but evernote actually makes money. they sell a product and people buy it. quite a few people actually. I don't have the exact numbers, but i'd like to before calling this absurd. this article from 2010 - http://techcrunch.com/2010/05/28/video-evernote-ceo-phil-libin-shares-revenue-stats-and-how-to-make-freemium-work/ http://techcrunch.com/2010/05/28/video-evernote-ceo-phil-lib... -said they make an average of .25 a month per customer. if that's still true then they actually have a pretty decent amount of money coming in. if anyone has more recent numbers i'd love to see them.
ChuckMcM 15y ago
I don't think we're in a bubble, I think we don't have enough investment vehicles for rich people and so the lack of supply has driven up prices. Imagine you have $10M, how do you get your > 10% annual return now that the ponzi schemes have been rolled up? Not a lot of choices.
- guimarin 15y ago
  I think this is the exact definition of a bubble. The phenomenon of runaway demand by a 'new class' of investors/investments has always been the hallmark of bubbles. 1920s a real national stock market with almost instant communication, now 'anyone' could trade stocks. This created a demand for stocks, so a demand for companies that listed as stocks. The 1960s, aka the go-go years. This bubble was around the conglomerate instrument. Some conglomerates did well, so everyone wanted to invest in the 'new' thing conglomerates. 1980s. Junk Bonds, or high-yield debt as we call it now. New financial instrument initially does well, demand soars. 1990s, internet companies. Recognition that the internet is going to change the world, everyone wants to own a stock in internet companies, a ton of crappy IPOs. 2000s, market conditions ripe for housing bubble. late 2000s, stat-arb blows up ( for unrelated to stat-arb reasons ) due to over-reliance on new financial vehicles. 2010s, being an 'angel' is easier than ever, and who wants to miss out on the next google/facebook. Make no mistake, there is a bubble in early stage companies/financing. What is driving it is the same. runaway demand. This particular bubble is different than the last, because the primary implication of the last has not yet been absorbed. The regulatory structure for raising capitol and 'exiting' has not caught up to a simple reality. New technology displaces old technology faster than regulated exits can be executed. Just look at Groupon. Why do I, as a business, list with groupon, when I can just as easily list with 600 competitors who might be more specialized/niche?
- OzzyB 15y ago
  "I think we don't have enough investment vehicles for rich people and so the lack of supply has driven up prices" I think there's a strong correlation between the end of the recent Housing Bubble, and the start/ramp-up of all these $Billion tech companies. I think you're right that rich people need to put their money somewhere, whether that makes this surge in tech valuations a bubble, I'm not sure, I sincerely hope not; but I am fearfull of when the "rich money" starts looking for greener pastures... If memory serves, the only reason the Housing Bubble happened in the first place was because of the end of the "web 1.0" tech bubble. Is history repeating itself?
jordhy 15y ago
I completely agree with you. The problem is the market hasn't found an adequate discount rate for startup success in the social network / web 2.0 reality. Nobody knows how much Evernote is worth because its business model is so Swiss generis. Evernote wants to establish itself as a knowledge repository and, in doing so, is competing with nearly every single company in the tech field: Google, Microsoft, Facebook, Bento, IBM, CMSs, Doc managers, Yammer, Apple, on and on and on. Could Evernote beat them all or raise to a market share that warrants a 1 billion valuation. Absolutely. They can and they have. the product is fascinating: easy, fast, ever present, cloud integrated and intuitive. However, can Evernote sustain this position for half a decade? Absolutely not. Here's why: - the goal Evernote is chasing is to ambitious and is being chased by bigger dogs - in this field integration with OS is key. Microsoft and Apple clearly have the upper hand - viral he network effect of Evernote's biz model is not strong enough to keep people using the platform. The churn rate is very big. If you start using Apple notes is very hard to switch, for example. I've been following this company for a while, and as much as I respect their execution I simply think this number is a reflection of current market conditions, nothing more. Hence cast my vote for a bubble.
- jcfrei 15y ago
  spot on. as usual asset pricing fails on longer time horizons. add an unrealistic assumption on how long those companies will stay on the upswing (eg. acquiring new users) and you end up with ridiculous valuations. matter of fact, looking at the ever faster changing nature of the internet, a lot of businesses will become obsolete and hence just extrapolating current earnings exponentially into the future is a stupid and risky bet.

ajross 15y ago

Undeniably. Now the question to me though is how a pre-IPO valuation bubble pops. Obviously lots of venture investors lose a lot of cash if these companies can't exit; but that cash wasn't in the public markets anyway and shouldn't cause a ripple, right? Who is bearing the risk here? What money will flee where when it becomes clear that Groupon and Evernote are losses and that Facebook is going to break even at best with their IPO?

adamjernst 15y ago
All this VC money comes from pension funds, university endowments, and other large institutional investors that are looking for a return on investment that is higher than regular public equities. When the crash comes, pensions and endowments will stop seeing tech venture funds as a safe investment so they'll shift their money elsewhere, leaving VC firms without money to invest.
- ajross 15y ago
  Exactly, so it really doesn't "pop" then, except in the sense of drying up access to cash in our own little community. That doesn't sound so bad. Remember YC was founded in an environment of limited venture funds and those early startups seem to have done quite well on the whole.

rollypolly 15y ago

When would you say this bubble started?

clarky07 15y ago

I'm fine with calling instagram type stuff a bubble, but evernote actually makes money. they sell a product and people buy it. quite a few people actually. I don't have the exact numbers, but i'd like to before calling this absurd. this article from 2010 - http://techcrunch.com/2010/05/28/video-evernote-ceo-phil-libin-shares-revenue-stats-and-how-to-make-freemium-work/ http://techcrunch.com/2010/05/28/video-evernote-ceo-phil-lib... -said they make an average of .25 a month per customer. if that's still true then they actually have a pretty decent amount of money coming in. if anyone has more recent numbers i'd love to see them.

ChuckMcM 15y ago

I don't think we're in a bubble, I think we don't have enough investment vehicles for rich people and so the lack of supply has driven up prices. Imagine you have $10M, how do you get your > 10% annual return now that the ponzi schemes have been rolled up? Not a lot of choices.

guimarin 15y ago
I think this is the exact definition of a bubble. The phenomenon of runaway demand by a 'new class' of investors/investments has always been the hallmark of bubbles. 1920s a real national stock market with almost instant communication, now 'anyone' could trade stocks. This created a demand for stocks, so a demand for companies that listed as stocks. The 1960s, aka the go-go years. This bubble was around the conglomerate instrument. Some conglomerates did well, so everyone wanted to invest in the 'new' thing conglomerates. 1980s. Junk Bonds, or high-yield debt as we call it now. New financial instrument initially does well, demand soars. 1990s, internet companies. Recognition that the internet is going to change the world, everyone wants to own a stock in internet companies, a ton of crappy IPOs. 2000s, market conditions ripe for housing bubble. late 2000s, stat-arb blows up ( for unrelated to stat-arb reasons ) due to over-reliance on new financial vehicles. 2010s, being an 'angel' is easier than ever, and who wants to miss out on the next google/facebook. Make no mistake, there is a bubble in early stage companies/financing. What is driving it is the same. runaway demand. This particular bubble is different than the last, because the primary implication of the last has not yet been absorbed. The regulatory structure for raising capitol and 'exiting' has not caught up to a simple reality. New technology displaces old technology faster than regulated exits can be executed. Just look at Groupon. Why do I, as a business, list with groupon, when I can just as easily list with 600 competitors who might be more specialized/niche?
OzzyB 15y ago
"I think we don't have enough investment vehicles for rich people and so the lack of supply has driven up prices" I think there's a strong correlation between the end of the recent Housing Bubble, and the start/ramp-up of all these $Billion tech companies. I think you're right that rich people need to put their money somewhere, whether that makes this surge in tech valuations a bubble, I'm not sure, I sincerely hope not; but I am fearfull of when the "rich money" starts looking for greener pastures... If memory serves, the only reason the Housing Bubble happened in the first place was because of the end of the "web 1.0" tech bubble. Is history repeating itself?

jordhy 15y ago

I completely agree with you. The problem is the market hasn't found an adequate discount rate for startup success in the social network / web 2.0 reality. Nobody knows how much Evernote is worth because its business model is so Swiss generis. Evernote wants to establish itself as a knowledge repository and, in doing so, is competing with nearly every single company in the tech field: Google, Microsoft, Facebook, Bento, IBM, CMSs, Doc managers, Yammer, Apple, on and on and on. Could Evernote beat them all or raise to a market share that warrants a 1 billion valuation. Absolutely. They can and they have. the product is fascinating: easy, fast, ever present, cloud integrated and intuitive. However, can Evernote sustain this position for half a decade? Absolutely not. Here's why: - the goal Evernote is chasing is to ambitious and is being chased by bigger dogs - in this field integration with OS is key. Microsoft and Apple clearly have the upper hand - viral he network effect of Evernote's biz model is not strong enough to keep people using the platform. The churn rate is very big. If you start using Apple notes is very hard to switch, for example. I've been following this company for a while, and as much as I respect their execution I simply think this number is a reflection of current market conditions, nothing more. Hence cast my vote for a bubble.

jcfrei 15y ago
spot on. as usual asset pricing fails on longer time horizons. add an unrealistic assumption on how long those companies will stay on the upswing (eg. acquiring new users) and you end up with ridiculous valuations. matter of fact, looking at the ever faster changing nature of the internet, a lot of businesses will become obsolete and hence just extrapolating current earnings exponentially into the future is a stupid and risky bet.